Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

PPG Industries Inc. (NYSE:PPG)

Q2 2010 Earnings Call

July 15, 2010 02:00 pm ET

Executives

Vince Morales - VP, IR

Chuck Bunch - Chairman & CEO

Bob Dellinger - SVP, Finance & CFO

Analyst

Frank Mitsch - BB&T Capital Markets

Kevin McCarthy - Banc of America

John McNulty - Credit Suisse

Sergey Vasnetsov - Barclays Capital

John Roberts - Buckingham Research

David Begleiter - Deutsche Bank

P. J. Juvekar - Citigroup

Dmitry Silversteyn - Longbow Research

Vince Morales

Hello, this is Vince Morales, Vice President of Investor Relations for PPG industries. Welcome to PPG’s second quarter 2010 financial teleconference. Joining me on the call today from PPG is Chuck Bunch, Chairman of the Board and Chief Executive Officer; Bob Dellinger, Senior Vice President, Finance and Chief Financial Officer; and Dave Navikas, Vice President and Controller.

Our comments relate to the financial information released on Thursday, July 15, 2010. Visual supporting this briefing may be accessed through the Investor Center on the PPG website at ppg.com.

As noted on slide number two, our prepared remarks and comments made in the subsequent question-and-answer session may contain forward-looking statements reflecting the company’s current view about future events and their potential effect on PPG’s operating and financial performance. These statements involve risks and uncertainties that could effect the company’s operations and financial results, and as discussed in PPG industry’s filings with the SEC, may cause actual results to differ from such forward-looking statements. The company is under no obligation to provide subsequent updates on these forward-looking statements. This presentation also contains certain non-GAAP financial measures.

Pursuant to the requirements of Regulation G, the company has provided in the appendix of the presentation material, reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures. The agenda for today’s discussion is noted on slide number three. And now, let me introduce PPG’s Chairman and CEO, Chuck Bunch, who will provide the opening remarks.

Chuck Bunch

Thank you Vince and welcome everyone. This afternoon, I will provide a brief overview of our second quarter performance. Bob Dellinger will review details of our financial results. I will make a few closing remarks and then we will take questions.

PPG’s strong results this quarter benefited largely from a 10% increase in volumes. The breadth of geographies and end use markets that we serve is enabling us to leverage continuing positive momentum in global industrial demand. The performance of our portfolio is being elevated by higher industrial activity and strong demand across Asia/Pacific and Latin America which is more than offsetting weak construction in North America and Europe.

Our performance and growth occurred consistently through the quarter and all of the major regions contributed. Our earnings per share were close to 2008 pre-recession levels as we leveraged the volume growth with our now lower cost structure. Our earnings this quarter were aided by an improved sales mix in some of our top performing businesses such as Aerospace, Auto Refinish and our Optical and Specialty Materials segment.

As a matter of fact, both Optical and Specialty Materials and performance coating segments posted record earnings results. Our Optical segment posted sales growth rates approaching 20%, and it remained our top operating margin segment. Performance Coatings delivered record earnings as margins grew by over 200 basis points. Our auto refinish, aerospace and protective and marine coatings businesses, all delivered increased sales which more than offset the impact of lower volumes in our US Architectural Coatings business.

Our Industrial Coatings segment continued to approach historical earnings levels. In the second quarter, the segment delivered 12% operating margins for the first time since 2006. Segment volume growth was more than 25% versus a recession-weakened prior year period. We achieved 40% growth in our automotive OEM Coatings business, easily outpacing the 25% year-over-year global industry growth and we continue to realize double-digit percent growth in our general industrial business in the emerging regions.

In architectural coatings, EMEA, our volume performance was consistent with the past several quarters, declining about 5%. Currency conversion negatively impacted sales and accounted for half of the earnings drop. Results in our commodity chemical segment improved nicely versus last year on higher demand and lower input cost. Most notable was the $50 million improvement versus the first quarter of 2010 due to improving pricing, higher demand and lower natural gas costs.

Our glass segment benefited from substantially improved performance in our Fiber Glass business, including improved equity earnings from our Asian joint ventures. The strong and continued improvement in the company’s financial performance this past quarter occurred despite demand that still remains more than 10% lower than 2008 pre-recession levels. Our strong performance clearly reflects the benefits from our improved business portfolio along with our lower cost structure. We are positioned for further earnings growth opportunities as the global economy continues to recover and through utilization of our strong balance sheet. Now, I’ll turn the call over to Bob to provide additional details on our financial performance for the quarter.

Bob Dellinger

Thank you, Chuck. I will begin by reviewing the year-over-year bridge of our second quarter sales which is detailed in the accompanying slide pack on slide number four. Sales improved about $340 million or 11% versus the second quarter of 2009, which was negatively impacted by the global recession.

Overall pricing improved modestly, by about $20 million. Higher prices in our coatings segment offset lower pricing in the glass businesses and more specifically in our performance glazing business, which remained impacted by weak US construction markets.

Year-over-year pricing was also lower in commodity chemicals, however pricing levels in commodity chemicals this quarter have moved higher versus the first quarter of 2010. Compared to last year, currency conversion reduced sales by $9 million as the impact of a much weaker Europe was nearly offset by stronger currencies in Asia, Latin America and Canada.

As Chuck mentioned, we realized a strong increase in volumes. This improvement of more than $300 million was driven by higher global industrial activity in all regions of the world. Weaker construction markets in the mature regions of Europe and North America attracted somewhat from our volume growth.

As illustrated on the graphs, our year-over-year volume comparisons this quarter were similar to the first quarter despite a more difficult comparison period in 2009. As detailed on the lower right chart in comparison with 2008 pre-recession levels, we remained down more than 10%, also comparable to the first quarter.

Further details on our sales are contained on the next slide. As you can see the emerging regions of Asia/Pacific and Latin America are continuing to grow faster than the developed regions of the world. Asia/Pacific continues to be a considerable growth platform for the company but primarily by our industrial businesses serving both exports from the region and local consumption within the region.

While there is concern regarding property value appreciation in China as detailed on the top right chart, only 3% of our total Asian sales stem from China architectural coatings. In the United States and Canada we continue to experience solid growth, again driven by higher industrial activity along with improving commodity chemical demand. However, our business selling into the construction markets declined versus the prior year due to the continued weakness in those markets.

Somewhere in the last quarter, our volumes in Europe increased slightly versus the prior year’s quarter and as we expected heading into the year, the region lags the other major global regions in overall pace of economic recovery. However volumes remain stable as our industrial businesses continue to benefit from higher activity levels including more exports from the region, which is offsetting the continuing modest weakness in the construction markets.

Looking ahead for the company, the global economic recovery began to take hold in the second half of 2009, and as such, our second half comparable periods will be more difficult. Also the third quarter’s traditionally a slower quarter seasonally in several of our businesses and we expect this historic trend to continue this year.

However for the second half of 2010 we do anticipate to benefit from the continuing of the macro trend of gradually improving global industrial activity and expect construction markets to remain sluggish.

Our adjusted earnings per share is presented on the next slide. A reconciliation of these amounts to our reported earnings per share is included in the appendix to today’s presentation materials, which is available at the Investor Center on our website at ppg.com.

In the quarter, our adjusted earnings per share were $1.64 versus $0.91 last year. Clearly the largest contributor in our improvement was the benefit from higher sales volume. Traditionally, our lower cost structure including the savings from our prior restructuring actions and our lower tax rate contributed heavily.

While our selling prices were higher, they did not fully offset the impact of higher coatings raw material cost. Coatings raw materials began to inflate early in the year due to higher demand and several supplier outages and that inflation increased in the second quarter. In total for our coatings businesses, cost rose mid-single percent, although the rates differ by region and by business. Further inflation pressures have subsided and we are now working to offset the transitory margin compressions in several business units with additional pricing initiatives.

Currency conversion also negatively impacted our earnings. Stronger currencies in Asia, Latin America and Canada offset a weaker year within our business segments. However, our corporate costs were impacted by just over $10 million as our losses from converting balance sheet exposures this year compared with gains in the second quarter of 2009.

Lastly, we lowered our 2010 tax rate to 28% based on the geographic mix of projected full year results. When compared with the company’s previously estimated 2010 tax rate of 30%, the lower rate added $0.07 to our second quarter results, including $0.02 based on the catch up of reducing the rates for the first three months of 2010. Our second quarter 2009 tax rate was 33%.

Moving now to review our individual business segment, let me start on the next slide with Performance Coatings. In the quarter, sales exceeded $1.1 billion, growing by $45 million versus the period year’s period. Overall volumes were flat; however, the segment experienced positive currency conversion and delivered higher selling prices, which were focused on countering inflation.

Earnings advanced by $32 million versus the prior year to a quarterly record of $190 million. Operating margins expanded 230 basis points as our continued strong cost controls supplemented the improved sales mix resulting from the performance of several of our top performing business units.

Our automotive refinish business continued to recover from last year’s recession and customer de-stocking. Aided by an improved general economic recovery and higher miles driven, the business accelerated to double-digit sales growth this quarter excluding modest favorable currency impact.

Sales also grew in our protective and marine and aerospace business. These businesses both have a sizeable aftermarket component, serve late economic cycle industries and did not experience anywhere near the same degree of volume decline during the recession as most of our other businesses.

Combined sales for these businesses this past quarter were up low single digit percent versus last year, reversing the trend of very modest sales declines that we experienced in the past four quarters. We expect the stable nature of these businesses to go unchanged.

Volumes in our architectural coatings, America and Asia/Pacific business declined mid-single digit percentages versus last year but the trend was modestly improved versus the year-over-year results in the first quarter.

Results in our national accounts or do-it-yourself channel once again outpaced our company-owned stores. US volumes continued to be hampered by restrained commercial construction activity and continued depressed levels of residential housing activity. However, selling price actions we initiated in the business earlier in the year had been successful, and we are selectively seeking additional price for the second half of the year in an effort to offset raw material inflation.

Looking ahead, we expect the overall construction markets in the United States to remain at low historic levels for the foreseeable future. Overall, Performance Coatings has continued to deliver strong results that are being further enhanced because some of our top performing businesses are growing more rapidly. Also aiding the segment results is the size of our Asian business, which is now the second largest region for the segment and it’s delivering the highest growth rate. We expect the improved business and geographic mix to continue to aid the second half results.

The Industrial Coatings segment results are on the next slide. As you can see, the segment’s financial performance has continued to strengthen. In the quarter, sales grew 27% or about $200 million to $939 million, with nearly the entire gain coming from volume growth when compared with last year’s recession impacted results. All regions participated in the strong year-over-year growth, and importantly sales levels in each region were consistent with or higher than first quarter 2010 levels. Earnings improved by $84 million to $112 million and our operating margin is right below 12%. In addition to the higher volumes, lower costs from both cost management and restructuring related initiatives also contributed. Higher raw material costs somewhat tempered these earnings improvements.

Automotive Coatings, our largest individual business in this segment experienced 40% volume growth in comparison with last year’s very low level. Our growth outpaced the overall global auto industry production figures, which grew by more than 25% versus weak prior year global production figures.

Sequentially, industry production advanced about 6% versus the first quarter of 2010. In general, the industry continues to match production with sales and inventories remained at low levels from a historical perspective. Sales for this business in each region reflect strong year-over-year sales growth led by our US region which posted 75% growth on both end use market recovery and market share gains. The third quarter is normally a seasonally slower quarter due to planned automotive OEM facility shutdowns. And we expect a similar but less acute pattern this year.

Our Industrial Coatings business unit delivered solid growth levels around 20%, further reflecting an improving general industrial economy in all major regions. Both Asia-Pacific and Latin America growth was around 40%, similar to the first quarter. Growth in the mature regions also was consistent with the first quarter between 7% and 10%. All of these sequential comparisons are despite a more difficult comparable period in 2009.

Our Packaging Coatings business also delivered moderate sales growth and solid financial results. This business remains a consistent performer. Overall, the Industrial Coatings segment continues to return toward historic operating margins. The absolute earnings we achieved this quarter were our highest second quarter results in a decade, despite sales volumes that still remain nearly 15% below pre-recession 2008 levels. Looking ahead, we anticipate traditional seasonal impacts to result in lower third quarter sales. We will keep our cost focus and we remain comfortable with the prospects of continuing gradual recovery in the global industrial market.

Results for our Architectural Coatings Europe, Middle East and Africa or EMEA business on the following slide. Sales in the quarter of $500 million were down $27 million versus last year’s period and earning declined $5 million. Currency conversion was a notable factor in the sales decline and accounted for half of the earnings decline.

Over the past year, the results of this business have been stable and this pattern held true during the quarter. Volume trends remain consistent with the recent quarters down mid-single digit percent to do continued sluggish housing and construction markets in the geographies we serve.

As illustrated on the bottom-right chart, our geographic footprint includes very little to no exposure in Southern European countries and other countries which have experienced the most significant declines in construction, including those such as Portugal, Italy, Ireland, Greece and Spain which combined account for only about 1% of segment sales.

As we have traditionally shown included on the slide are the earnings before interest, taxes, depreciation and amortization or EBITDA, we believe EBITDA is a relevant measure for this segment given the ongoing non-cash amortization expense from the SigmaKalon acquisition. As detailed EBITDA margins were once again comparable this quarter versus last year. Looking ahead, we anticipate similar business trends will remain and based on current exchange rates we expect currency conversion to again detract from year-over-year segment results in the third quarter.

Our Optical and Specialty Materials segment results are detailed on the next slide. Versus the prior year, second quarter sales surpassed $300 million up $46 million up nearly 20% volume growth. Earnings grew by 41% to $86 million a new record for this segment. Both, business units Optical Products and Silicas continued to benefit from improved overall demand, new product sales and product line extensions.

Our Optical Product sales are now approaching the peak levels we achieved directly following the introduction of our Generation 6 Transition Lense product. Our operating margins were consistent with the past quarter and remained at more than 28% through the first half of the year, which is detailed on our chart compares favorably versus prior years doing parts of the benefits of restructuring actions completed in 2009.

Looking ahead, the third quarter is typically a slower quarter seasonally and we anticipate this trend will continue this year. The next slide displays our Commodity Chemical segment results, compared with last years second quarter sales advance by more than $40 million and earnings grew by $11 million. Improved demand more than offset lower caustic soda pricing and our higher capacity utilization positively impacted manufacturing cost.

In comparing results, this quarter versus the first quarter of the year we delivered significant improvement as the business has rapidly recovered from trough earning levels. Sales advanced $32 million as higher volumes were coupled with higher pricing for the ECU which is an aggregate of chlorine and caustic soda prices. Segment earnings jumped by $50 million as sales gains combined with lower natural gas cost.

Despite our higher production rates, increased demand has cut our inventory in half versus last year. Looking forward we expect modestly higher natural gas unit cost in comparison with second quarter and we are implementing additional previously announced price increases in both chlorine and caustic soda.

Our glass segment results are on the following slide. Sales were $247 million, up $40 million or 19% due to dramatic improvement in fiber glass volumes which in turn are a result of improved global industrial demand. Segment earnings improved to a $16 million profit compared with a loss of $7 million in the prior year. The 60% year-over-year increase in fiber glass volumes resulted in improved manufacturing utilization, upto nearly a 100% capacity utilization at quarter’s end.

Activity levels in the US architectural glass market, both commercial and residential construction built by our performance glazings business remained challenging. Equity and royalty earnings continued to improve during the quarter and we also benefited from lower costs including savings from the restructuring actions we completed last year. We are pleased with the positive earnings momentum and looking forward, we have recently initiated further selling price initiatives.

Let me conclude my remarks by discussing some cash details which are on the next slide. We ended the quarter with just under $800 million of cash on hand, down from last year’s $1 billion level. As we began to deploy our cash in a balanced manner over the past 12 months. We spent about $50 million on capital expenditures during the quarter, bringing our 2010 year-to-date total to $93 million.

We also repaid more than $50 million of debt in the quarter bringing our year-to-date total to about $200 million. We don’t anticipate any further debt reduction of significance for the remainder of the year. Our quarterly dividend payments, an important part of long-standing heritage at PPG were $90 million and a total of

$180 million for the year. We also spent slightly over a $100 million on repurchasing 1.6 million shares of PPG stock. We have more than 4.5 million shares remaining under our current share repurchase authorizations. Year-to-date returning money to shareholders in the form of dividends and buybacks which is a PPG legacy has accounted from nearly half of our cash usages.

One other cash item is pension contributions and as we previously stated, we expect full year 2010 contributions to our pension plan of $240 million and have contributed about $50 million year-to-date. For the full year of 2009, we put approximately $450 million in cash and company stock into our plans including $210 million in the first half.

Our cash position still remained very strong, especially when considering that due to the seasonality of our businesses, our strongest cash generation quarters are in the second half of the year. We intend to remain disciplined and balanced with our cash deployment, but with a focus on growing earnings per share. We are reviewing potential bolt-on acquisitions and also anticipate further share repurchases will be a likely use of cash this year.

With that, I will now turn the call back over to Chuck for some closing remarks.

Chuck Bunch

Thanks Bob, I will conclude by reiterating a few key items. Our global geographic footprint and a broad set of end-used markets that we serve are continuing to yield benefits. This was clearly in evidenced this past quarter as we leveraged the moderate global industrial recovery. Our results were aided by growth in emerging regions and an improved sales mix resulting from stronger results in our top performing business, including Optical and Specialty Materials, Aerospace and Auto Refinish. Our commodity chemical segment rapidly returned to solid profitability and our glass business delivered mid-single digit margins on strong fiber glass demand.

As with the first quarter, we continue to experience solid earnings leverage on higher sales volumes, reflecting the benefits of the structural cost reductions we completed during the recession. Let me conclude by commenting that I am encouraged with our earnings recovery and that I believe we remain well positioned to capitalize on what we anticipate to be a continued gradual global economic recovery. Also, we are beginning to utilize our strong balance sheet to accelerate growth. We are currently reviewing several small to mid-sized acquisitions in the $20 million to $250 million range and intend to remain active on share repurchases. That concludes our prepared remarks.

Now operator, would you please give instructions and open the phone lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Frank Mitsch from BB&T Capital Markets.

Frank Mitsch - BB&T Capital Markets

You’d hardly know that there’s concerns about the economy out there. I mean it’s the best result in several years at a minimum in the second quarter. We've been hearing a little bit about on the paints and coatings side that the raw materials have become tighter. I think you alluded a little bit about how the price inflation of raws has outpaced your selling prices.

Can you talk about the availability of raws, is that hampering? Are your volumes to any extent and I know that I think Bob mentioned that you've got some selective price initiatives underway in that sector, would you anticipate that that would fully offset by year’s end, the raw material inflation that you have seen so far in that sector?

Chuck Bunch

I would say that we had a few spot shortages during the second quarter. There were a couple of suppliers that had unexpected outages or production problems. It probably shifted some business around for us, but we don’t think we lost any orders on an ongoing basis and if anything probably a little of the activity would shift into the third quarter.

So, availability is not a major concern for us right now and pricing has stabilized in the markets for our principle raw materials, so some of the feedstock costs as we've talked previously in propylene or ethylene are actually drifting down. So, at this point we don’t see supply issues and we think that raw material pricing is stabilized, albeit at a higher level than we saw at the beginning of the year.

Frank Mitsch - BB&T Capital Markets

All right, terrific and obviously nice job by Mr. McGarry and his team. Can you comment a little bit about the pricing that you've realized, the $80 in the second quarter, I guess you've got 35 to 50 on tap in caustic for the third quarter, chlorine $50 on the table for the third quarter. What is the status of those increases as well as and I guess, I think you indicated it was going to be marginally higher, how does that interplay workout as we look at the third quarter?

Chuck Bunch

Well if I stick with your first part of your question, Frank, the pricing environment in core alkali is firm, we have now been implementing the $80 that was announced in the second quarter, the industry didn’t get all of that at once, it was phased in over the second quarter and now with the $35 increase announced in July, we think that this will be implemented on a customer basis probably taking into consideration at what phase they were in contracts. So right now we do not anticipate any significant problems in implementing the second or this smaller third quarter increase, volumes have stayed up on the caustic soda side, inventories are low and we feel confident about the pricing environment for caustic soda.

There has been a price increase initiative in Europe, stable pricing in Asia, so on a global basis, we think that we have a solid pricing environment for caustic soda. On chlorine, there was a $50 announcement here in the third quarter that we expect to be phased in over the course of the quarter depending on contracts. There is a little more resistance with the PVC customers, but the other merchant chlorine customers are receiving price increases. So here too we feel that the pricing environment for chlorine is stable to firm.

Frank Mitsch - BB&T Capital Markets

Chuck, if I could read into your tone, it doesn’t seem to me like you are a man troubled by the possibility of a double dip coming up, is that fair?

Chuck Bunch

If you recall, what we’ve been through over the last couple of years in the chlor-alkali business, Frank. In our description of our results here for the second quarter and it's probably been a trend for a little longer, the industrial activity has been quite good, strong, restarting from recession levels, but the construction markets especially in the developed regions have been weak. We had these same economic conditions here in North America, weak construction markets, therefore weak PVC production; that strengthens the opportunity for firm pricing in caustic soda. So, we have shown in 2007-2008 that strong industrial activity while we have weak construction activity actually helps the merchant players like PPG, and it strengthens the pricing environment for caustic soda. So at this point even if we continue this economic environment that we saw in the second quarter, we feel quite optimistic that we’re out of the trough for the chlor-alkali business and then we should continue to build all the momentum that you saw after lunch here in the second quarter.

Operator

Our next question comes from the line of Kevin McCarthy from Banc of America

Kevin McCarthy - Banc of America

Would you elaborate on the relative strength that you saw in auto OEM versus the industry, is that a function of geographic mix in North America and Asia or did you perhaps gain share or maybe you are aligned with the right brand owners at this point?

Chuck Bunch

Kevin, this is Chuck. I would say that what we have seen is a good customer mix on part of our PPG customer portfolio on automotive OEM. I would say one of the biggest upsides for us though has been our position in China. We are the number one automotive OEM coating supplier in China. We have a broad-based customer array including the global players like General Motors or Volkswagen and also a very good position with the domestic and regional producers. So I would say we had some gain from there. We are also very well aligned with the German producers now. That hasn't always been the case for PPG but if you look at our position with the BMW or Mercedes, the German automotive producers have been the strongest in Western Europe. We are well aligned there. We are also seeing good growth in Russia where we have a nice position. General motors and other customers here in North America, I think we are well positioned, but I would say the single biggest factor in our volume gains are coming from our position in China.

Kevin McCarthy - Banc of America

With regard to fiber glass, I think you mentioned you are operating near 100% capacity at this point. Is the demand strength there being driven more by electronics or by reinforced plastics there? And then given the notion that you are nearly sold out, what does the future look like? In other words, should we anticipate greater pricing power or possible expansions required at some point?

Chuck Bunch

On the two markets for fiber glass, both of them are running equally well. So if you take our reinforcements business which is primarily supplied for PPG here in North America and in Western Europe, we are operating at a sold out capacity basis. We are implementing price increases for four reinforced products and we have almost full capacity utilization. We have one idle furnace that we are attempting to bring on here in the second half of the year. So we are sold out in the West and implementing price increases. Again, a lot of this is driven by the capacity reductions by ourselves and many of our competitors during the recession and we think the environment is very solid for the coming years now because of some of these capacity rationalizations.

On the electronics side, which is, we participate through a large joint venture that we have with Nan Ya Plastics in Taiwan, in China; that business is booming and we are running at capacity, there have been a number of significant price increases, and both sides of the business or end-used markets, reinforcements and electronics are driving both the volume and profitability improvements that we see in that business Union and it's reflected overall in this segment. So we feel pretty good about fiber glass right now.

Operator

And our next question comes from the line of John McNulty.

John McNulty - Credit Suisse

Just two quick questions. You think the economy and the industrial economy in particular is going to gradually keep improving, are there any areas where you saw any incremental weakness as you went through the quarter?

Chuck Bunch

Incremental weakness as we went through the quarter? I would say no. If you look at you know geographically, probably the industrial economy that’s still growing but at a slightly slower rate would be Europe. We are seeing even automotive OEM production. We are forecasting a modest volume improvement in the second half. This would be 5% or below. The rest of our industrial activity we think will be up in the second half in Europe, but certainly not as strong as what we are seeing in Asia, Latin America or even the North American markets. So right now as we went through the second quarter, we pre-announced guidance in the middle of June and we expected I think at that time to make the middle to higher end of the range but actually the second half of June finished strongly, and a couple of businesses notably chlor-alkali continued to accelerate through the rest of the month. We didn’t see any fall off in sales or orders in key markets in Asia or North America. So through the second quarter and now here starting in the third quarter, we have not seen an inflection point, certainly not down, and the continuation of the current trends that we’ve talked about in these announcements.

John McNulty - Credit Suisse

Thanks for the color on that. And then with regard to your architectural business, you had indicated the DIY market was stronger than it sounds like the stores business or contractor business that you do, was it positive and stores negative or were they both negative and it was just a degree of one being worse than the other?

Chuck Bunch

They were both negative for us in the second quarter, DIY, a little less so than the stores or contractor business. Not appreciably different, although obviously, when we go through retailers or independent dealers, those aren’t direct sales. Sometimes we will move inventory into their locations and depending on when they move out from the warehouses or get on the shelves, we don’t always see as regular an order pattern as we would in the stores. So it wasn’t an appreciable difference, but weak volume in both places, less so though in DIY.

Operator

Our next question comes from the line of Sergey Vasnetsov from Barclays Capital.

Sergey Vasnetsov - Barclays Capital

Chuck, if you compare your volume recovery, specifically in your performance and industrial coatings businesses, maybe by large segments and by region versus the underlying market, where would you say that you gained some market share? It sounds like it was a case in automotive OEM, is it true? And also which other segments or geographies if that’s the case?

Chuck Bunch

Well, I would say after automotive OEM our view, although again this is a business that goes through a two step distribution. Automotive Refinish had a very nice quarter. We think we are gaining share there and that is a global business for us, so we are well positioned in the fast growing regions like China, but we think we are gaining share in that business.

Aerospace, we had a modest volume improvement there. We are gaining share although our shares in that business unit are already quite high. And the other businesses we feel that we had more than held our own, although I can't say at this point we don’t have enough market data from the second quarter. The other businesses such as our General Industrial business, our Protective & Marine Coatings business, these would be businesses that we felt we didn’t see any appreciable share loss and it could turn out when we get all the data that these could be either stable to actual market share gains, but certainly Automotive OEM, Automotive Refinish, Aerospace would be coatings businesses where we were gaining share.

Sergey Vasnetsov - Barclays Capital

And so when you think about the sources of that share gains, is it your low cost base so you can compete more effectively, did you bring some new technology that you didn’t have and other people didn’t have for the past couple of years, or what is it that allowed you to gain some share?

Chuck Bunch

I would say the principle reason for gaining share in these markets is technology and global position. So if you take automotive OEM, we are very well positioned, globally. We have worked hard to establish ourselves in markets like China, not only with the global players, but with the domestic players. We have a full product array to meet all of their needs. There is a move in automotive OEM to what we would call a shorter or a compact processes where we can deliver cost savings but provide the same corrosion and decorative protection. So I would say that clearly it’s global position in technology in automotive OEM.

In Refinish, we feel that we have the best waterborne or water-based refinish system out there that’s helping us to gain share, especially in markets or regions where they are going from a solvent-based to water-based mandated system. So we think we are well positioned there and we have always been not only the market leader, but the technology leader in our aerospace products. So I think in all three of these, it would be global position, but technology. We have a better cost base certainly in these businesses after our restructuring and I think you see the effects of that, but certainly we’re not trying to win any business by just pursuing a lower price strategy.

Operator

And our next question comes from the line of John Roberts from Buckingham Research.

John Roberts - Buckingham Research

Hi. I was a little surprised that DIY North American volumes were down. You have easy comps there, there’s not a lot of commercial exposure. I thought there was some negative weather in the March quarter that might have benefited the June quarter and you had the housing stimulus that sort of drove turnover very high during the quarter.

Chuck Bunch

Well, I think if you look at the DIY segment, I haven’t seen the big box retailers comps yet. But if you remember, our first quarter numbers were very weak in January and February; then we had a very strong surge in March that I think that showed some strength for us in the first quarter. We also had some weather certainly in the second quarter, I don’t know across the country but certainly here in the North East June was a very wet and rainy month.

So, I would say that it’s a little early for us to see all of the market data out there but certainly we don’t see the same momentum on either the DIY or our company owned stores side although we are working hard at it, taking cost out but there is just not as much market strength as we would have hoped.

John Roberts - Buckingham Research

Secondly, on slide number four where you show the sales volume index, could you just provide may be some of the outliers, so optical is probably at a new high, fiber glass sounds like it’s at a new high, and then you have some things that must be down still 20% from the 2008 level like commercial construction coatings or others. Maybe most things are probably near the average but where are the outliers?

Chuck Bunch

Well, I would say that the weakest business that we had would be in our glass operating or reporting segment and that would be not the fiber glass business which drove a lot of the improvement but it would be that performance glazings business and that is primarily a North American commercial construction and North American residential construction play. So that was probably the weakest business out there from a volume standpoint for PBG. The other two businesses that were weaker from a volume standpoint, we've talked about architectural EMEA down about 5% and the North American architectural business is similarly down.

So, I would say of the businesses in our portfolio, those would be the three and coincidentally they are all construction related here in the developed economies in North America and Europe.

Operator

Our next question comes from the line of David Begleiter from Deutsche Bank.

David Begleiter - Deutsche Bank

Chuck, on your industrial businesses, what’s your visibility and order book? I know you are expecting continued growth. What do you actually have booked for the next period of time and how typical is that?

Chuck Bunch

I would say, as we've looked, let’s take the biggest business in that segment which is automotive OEM. We have visibility typically two to three months out and there's good forecasting not always completely accurate for the full year. And if you take the North American business, we started this year thinking that North American auto and light truck builds would be a little under 11. And then I think at this meeting three months ago we said, hey, 11, 11.5 and now I’d say it’s probably 11.5, maybe 11.6.

So, we have continued to see a good momentum out there, inventory levels are imbalanced. So our forecast if anything, have moved up slightly. In Europe, we aren’t expecting as strong a second half, but there is still volume growth as I’ve mentioned earlier. Russia is better than we thought, the German producers are stronger. And in China even though we’re probably not going to have the easy comps that we had in the first three or four months of the year, there is still good growth in Chinese automotive OEM productions.

So that we’re maybe not going to be plus 40% as we were in the first three or four months, but we were saying all along that we thought that production could be up 15% to 20% in China, for this year. We’re still sticking to that forecast, probably at the upper end of that. And we haven’t seen things appreciably slowdown in China, at this point. So, I would say in automotive, we’re not seeing any significant deviation from what we’ve been looking at.

On the industrial side, that is a whole range of products, including appliances, consumer electronics, coil and extrusion, and I would say that the business has been solid if not great, like automotive OEM. We haven’t seen any inflection points yet. Certainly as I’ve talked about our electronics exposure in fiber glass is booming. So, at this point you know we are watching, because obviously there is some negative sentiment, if you look at the media and what they’re projecting for the second half. We have talked about the one market that we thought in China may be overheated, which is Chinese construction, especially residential construction markets. We have much less of an exposure there. We have an architectural business in China, but it is the smallest of our major coatings businesses. We are doing fine there as well but we are watching that one. So at this point, we have not seen an inflection point. We are watching and we are a little cautious because of some of the headlines out there, but our businesses continue to perform well and we haven't seen a drop off yet.

David Begleiter - Deutsche Bank

And Chuck just on raws versus price, in Q3 would you expect your prices to now exceed your raws?

Chuck Bunch

If they would, it would be I think slight. I think we are trying to implement price increases now, and as I told you a stabilizing environment for coatings raw materials in the third quarter. So I said we may -- we will recapture what we haven't been able to get. Whether we over capture, I'm not sure at this point but I think you are going to see a more stable environment going forward and we will catch up a little bit here in the third quarter on pricing.

David Begleiter - Deutsche Bank

And for Bob, on your tax rate I know the geographic mix has shifted, lowered your tax for this year. Given the continued growth in those regions, do we stay at 28% in 2011 as well?

Bob Dellinger

At this point, I would stick with that. We certainly look at this as we get new [ph] forecasting, but right now I think that's pretty confident to model 28%. We saw strength in Europe in our industrial base and at an attractive tax rate and we had Latin America turn profitable and we are offsetting those profits with a net operating loss position. So those were favorable to our rate and yes I feel pretty comfortable 28%.

Operator

Our next question comes from the line of P.J. Juvekar of Citi.

P. J. Juvekar - Citigroup

Disappointing to see that North American architectural volume is down and correct me if I am wrong, but DIY was up last year. So I'm wondering why is it going down this year, and is it the case that maybe you lost share at those?

Chuck Bunch

I'd say it’s a little early for us to say. We certainly don’t feel that on the stain side. On the paint side, I think it depends on promotions during the quarter. We know that we have the mid and lower price points. That was more favorable position during the recession environment and it may not be quite as favorable now. We are promoting our products adequately. We haven't seen anything on the paint side yet that would show us we have a lost share, but I would say that overall it's still been a sluggish environment out there. And again depending on when we have our sales into the retailers, it doesn’t always match up on a quarter-to-quarter basis with the sales out the door.

P. J. Juvekar - Citigroup

And then you had a price increase in your stores earlier in the year. Did that stick in this environment? And then can you talk about your next price increase that you mentioned?

Chuck Bunch

Yes, we did have a price increase in our architectural stores business in the first quarter that was eventually followed by the other competitors in the market. At this point, we have not announced another price increase in our stores business and so we are monitoring the market and our position and depending on if we continue to see the stable raw material pricing environments, then we will not necessarily initiate a price increase in our stores.

P. J. Juvekar - Citigroup

And then if you take back, can you just talk about your outlook for the 2010 painting season, you know just talk about stores versus big boxes and what are you seeing on the remodeling activity?

Chuck Bunch

Well, I think what we are seeing is a continuation of the trends that we have seen over the past certainly a year and a half. We have not seen a resumption of strong volume activity in our stores business, which is a contractor oriented, these are contractor oriented stores. This is the commercial contractors as well as the residential painters.

I don’t see any reversal of the trends that we had commented on last year, if anything maybe the residential pieces slightly stronger, but more than offset by the continued weakness on the commercial side. DIY, I don't have all the data from the big box retailers to compare it, but not only in the same store sales, but they are paint department sales, but I would say on balance, the DIY is probably a little bit stronger then the contractor business and I would think that these will be confirmed as we go through the third quarter and see some of the major retailers releasing their same store sales growth.

Operator

Our next question comes from the line of Dmitry Silversteyn of Longbow Research.

Dmitry Silversteyn - Longbow Research

Good afternoon gentlemen. Congratulations on a very strong quarter. Couple of questions although most of them have been answered. Number one, you mentioned that you are going to have a little bit of seasonal slowdown in the automotive build rates going forward sequentially. On year-over-year basis, how do you look at this business, given the cash for clunkers programs in both the US and Europe last year or is that not a concern given how strong your position is in China and how rapidly things are growing there as well as your market share gains that you've been able to get over the past year?

Bob Dellinger

I would say on the automotive OEM side, there were scrappage programs just about every region and country in the US. If you look at the cash for clunkers specifically, it was a third quarter of 2009, fourth quarter of 2009 influence. So the comparables for us in the third and fourth quarter of 2010 versus 2009 will be not as good as the second quarter because if you remember the second quarter of last year, that’s when we had the bankruptcies of GM and Chrysler. That was probably the industry at its weakest. So, obviously on a year-over-year basis, we’re going to not show the same degree of improvement in the second half and we think that sales will continue to improve versus last year’s level without cash for clunkers.

In Europe, again, the eastern European countries, Russia, they are coming out of their recession rather well and the production there is growing. Germany benefiting I think from a stronger German economy and the export opportunities with that weaker Europe. So, I think even without the scrappage programs that a number of European countries have instituted last year, we are still going to see modest sales growth in Europe.

And in China, they did have some incentives in 2009 especially for smaller cars. Most of those are projected to decline in the second half or certainly into 2011. But right now, we see the growth rates moderating somewhat in China in the second half again, because of the strength of 2009 but still solid growth in that market even if some of the incentives from the Chinese government for the small vehicles are withdrawn.

Dmitry Silversteyn - Longbow Research

You talked about of the importance of fiber glass business due to the profit improvements you received in the segment. Can you quantify for us or at least ballpark for us how big that business is within the glass division?

Bob Dellinger

On a sales basis, they are about equal. The two businesses, although in fiber glass we do have two Asian joint ventures that don’t show on the sales line, that do help us on the net income line, but the businesses have an equal weight in sales in the sector.

Dmitry Silversteyn - Longbow Research

And profit, I am assuming it's significantly more coming from the fiber glass if not all?

Bob Dellinger

All the improvement came from the fiber glass business in this quarter and we looked to see that trend continuing because there is a lot of momentum right now in fiber glass or we are going to get some additional pricing, the performance glazings or flat glass business. Again, commercial construction is still weak out there. We’re doing a lot of good cost work, have a number of new product initiatives. We have some opportunities we think in solar energy. But right now overall, that weakness in commercial construction is over shadowing all the good work we’re doing in other parts of the business.

Dmitry Silversteyn - Longbow Research

In the fiber glass business is there much difference in the growth rates between epoxy resin systems versus urethane resin systems?

Chuck Bunch

I would say the biggest would not be in those areas, these are nylon and polypropylene based systems that they’re going into on the reinforcement side. You have epoxy resin systems as substrates with fiber glass on the electronics side and we’ve seen strength in both of those. Electronics has been booming but the reinforcements business which goes into a lot of industrial applications like automotives, that’s been very strong.

We’re seeing more use of fiber glass and plastic systems in automobiles because of the light weight advantages. We’re also seeing a little more activity on wind blades, an important part of our, what we would call our direct drill product line and fiber glass goes into wind blade production, that’s been a little inconsistent over the last couple of years.

We think wind power is the most competitive alternative energy source but some of the funding and financing for these big projects has been stalled out, so we haven’t seen quite as much growth there as we anticipate. But longer term, wind blade production for fiber glass and solar energy, glass production for performance glazings should be good market drivers for us in future years.

Dmitry Silversteyn - Longbow Research

That’s helpful. And last question on the tax rate, and you talked about 28%, is that going to be your rate for the year implying that in the second half you are going to be kind of a more in the 26%, 27% or is that the tax rate for the second half of the year?

Bob Dellinger

That’s the tax rate for the full year. Okay we had a $0.07 benefit in the first half I showed in the second quarter associated with the 28% rate for the first half was the 28% rate in the second half, 28% for the full year.

Operator

And our next question comes from the line of Arun Viswanathan [ph] from Susquehanna. Hello, your line is open.

Unidentified Analyst

The Commodity Chemicals segment, could you just update us on how the pricing initiatives are going and you expect any weakness there if you do see some slowness in industrial activity in the second half?

Bob Dellinger

Well, I went through some of the pricing initiatives for both caustic and chlorine, reviewed what had happened in the first and second quarter, here in the third quarter. We are seeing as I mentioned a very solid pricing environment for caustic soda. We think industrial activity is maintained, inventory levels are low, the cost basis for US-based industry in chlor-alkali because of the lower natural gas cost, lower ethylene, the export environment is solid, the dollar after a period of strengthening seems to be now or reverting to a weaker footing.

And in fact if I look at anything over the last week or so on the euro dollar, that’s going to help us a little more than we got helped in the second quarter and it will also I think potentially keep the European imports out of North America as I mentioned (inaudible) just announced a price increase for cost accelerating in Europe for the Asia aluminum settlement and caustic was up so I would say that the pricing environment right now is very solid and if industrial activity, if we see a return to the conditions so we saw 18 months ago where industrial activity dropped off, could that change this outlook conceivably but right now we haven’t seen that and if anything we're seeing more of a reversion to the conditions in 2007 and 2008 which led to record caustic soda prices and drove significant earnings improvement for our chlor-alkali business.

Unidentified Analyst

So I guess most of the other operational questions have been answered. The only other one was, just on the corporate level, what’s the kind of the right corporate level that you think would be on a quarterly basis expensed?

Chuck Bunch

What I would do [Arun] is average the first two quarters and use that for the basis for the second half for the year.

Operator

Ladies and gentlemen, I would like to turn the call over to management for closing remarks.

Chuck Bunch

I’d like to just thank everybody for their patience during our technical issues and we appreciate everybody’s time today and look forward to talking to you next quarter. Thank you.

Operator

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: PPG Industries Inc. Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts